Of Special Interest ...examining a significantly timely topic
Too Many Clocks
Whatever one’s philosophical leaning, the practice of adjusting earnings has left investors with too many watches to consult. We look deeper into the topic of adjusted earnings to gauge the slippage between commonly-referenced earnings clocks.
Try This On For Size
Today’s market is barbelled regarding company size, with the mega-cap Tech stocks and the S&P 600 Small Cap index both outperforming the middle of the S&P 500.
Cycles And Taxes And GICS, Oh My!
Analyzing quarterly financial results and developing insights about upcoming periods is always difficult, but the first quarter of 2018 was unusually complicated.
The Yin And Yang Of Utilities
Are Utilities defensives, or are they interest rate plays, or both? We believe the driving influence fluctuates based on market conditions, specifically fear, and the desire for protection in down markets.
Defensive Equity Styles: The Sultan Of Swat And The Splendid Splinter
After performing amazingly well in the record-setting bull market run since 2009, defensive equities are once again drawing attention for their traditional role as hedges against a continuation of recent market declines.
Factor Mapping: The Final Piece Of The Puzzle
This months-long research effort culminates with this commentary as we lay out our thoughts on factor rotation and introduce The Leuthold Group’s recently launched Factor Tilt strategy.
Leuthold Thematic Baskets 2.0
After a hiatus of several years, we are re-introducing one of our favorite analytical tools. A thematic basket is a custom-designed set of assets which are exposed to, and will react similarly to, a common theme. Our first new thematic basket is “Capital Spending Beneficiaries.”
Capital Spending Beneficiaries
Several key drivers of capital expenditures look particularly favorable right now, and this research note focuses on the potential for improving business conditions to produce an upswing in capex.
Muster Drill: To The Value Lifeboats
.jpg?fit=fillmax&w=222&bg=FFFFFF)
While we’re not calling for an imminent market top, we are keeping a diligent watch from the crow’s nest for signs of a coming market correction.
Coming Attractions
With an abundance of year-end updates in this edition of Perception for the Professional, we plan to release the content for this “Of Special Interest” section separately in mid-January.
The Many Faces Of Mo
Momentum is one of the most widely accepted alpha-generating factors, used by quantitative and fundamental managers alike. Its biggest drawback, however, is high turnover. Herein we explore momentum from the perspective of sector weights.
The Case Of The Disappearing Value Premium
Market history teaches us that investors behave differently in groups than they do as individuals.
The Latest Sure Thing
A fascinating aspect of long-running bull markets is the emergence of money-spinning strategies that come to be seen as “sure things.”
A Harbor In The Tempest
Our Major Trend Index (MTI) recently fell from “positive” toward stocks to a “neutral” reading, leading us to trim bullish equity positions in our tactical portfolios.
Actively Bearish, Passively Bullish?
Relative performance of active and passive mutual funds is one of the leading story lines in our industry, with passive’s recent advantage leading some to argue that it will be the dominant style forevermore. We disagree, and believe that the active/passive relationship has been, and always will be, cyclical.
Beatlemania And Narrow Markets
In April 1964, the Beatles simultaneously held the top-five spots on the Billboard Hot 100, a unique feat in the history of modern music.
Dynamic Factor Investing: A Study In Value
Investment factors experience performance cycles just like every other asset and index. The Value factor is robust across definitions, as all eight versions produced positive excess returns under long/short and long-only methodologies.
Sector Profit Margins: A Long-Term Review
Despite real GDP growth of just 1.6% in 2016, the median S&P 500 company earned a net profit margin of 9.7%, only 40 basis points below the record high established in 2014.
Stock Picking In A Season Of Animal Spirits
We examine past capex spending patterns and identify industries with sales growth rates that have historically been the most responsive to capex cycles.
Grappling With A Strong U.S. Dollar Outlook
.png?fit=fillmax&w=222&bg=FFFFFF)
Profitable investing overseas requires not one, but two, successful decisions: 1) select an outperforming asset class; and, 2) be in a currency that provides a favorable foreign exchange impact.
Factor Investing And The Importance Of Market Cycles
While factors do offer excess return they are by no means winners in all seasons. Our findings show that factor returns are cyclical, volatile, and unstable over time.
An Earnings Bottom...What's Next?
It seems like it’s been ages since investors have been able to get excited about earnings growth, although our October 21st “Chart of the Week” showed that the S&P 500’s current earnings slump has been unremarkable in both depth and duration.
Trends In Corporate Debt And Coverage Ratios
Long-term debt (LTD) issued by S&P 500 companies has risen 75% since 2010, and the resulting deterioration in leverage ratios has been all too evident.
Quantitative Factor Performance: Year In Review
Factor performance during 2016 is the reverse of that of 2014-2015. Quants and smart beta funds focusing solely on Value have enjoyed the year, while multi-factor approaches have struggled. Value has been the only factor that has provided positive performance this year.
An Initial Look At Smart Beta And Factor Investing
Also known as smart beta or strategic beta, factor investing has become the hottest portfolio management trend in the last five years. The smart beta space exceeds $600 billion in assets under management.
Dependence On Initial Conditions, Valuations And Forward Returns
A client inquiry led us to take a fresh look at the relationship between current valuations and subsequent stock market returns, which is a regular feature in our Benchmarks publication.
Same Ponds, Different Fish?
The impact of atypically-high current valuations has become a challenge for style-box investing. High quality, mature dividend payers have habitually resided in the Value and Blend boxes, but investors have bid up those valuations as they look for alternatives to low bond yields.
REITs: “We Are #11” - A Fresh Look At The Newest GICS Sector
On August 31st, Real Estate will become the newest GICS sector and the first Level 1 addition since the framework was unveiled in 1999—REITs had been classified as an industry under the Financials sector.
Valuation Metrics: Numerators & Denominators
Different measures of value may tell different stories. Using various metrics, we examine the valuation of Large Caps, Small Caps and equity sectors.
Time For Materials?
The Leuthold Materials sector jumped five spots to #3 in the June Group Selection (GS) rankings, its highest ranking in eight years and the first reading outside of the bottom four in almost four years.
Profit Margins At The Sector Level
S&P 500 profit margins mask the disparate trends taking place on a sectoral level. We dissect those trends with the ten major sectors grouped by five broad themes: Cyclicals, Commodities, Defensives, Interest Sensitives, and Tech/Telecom.
Implications Of Low Growth, Low Inflation, Low Rates
The current environment will likely persist longer than most expect which will put further downward pressure on profit margins. As margins come under pressure, companies increase leverage to prop up ROE. However, the market wants higher duration, not higher leverage.
Big U.S. Banks: We Have A Motion, Is There A Second?
YTD the S&P 500 has fallen 2% while the S&P 500 Banking industry group is down over 12%—a shortfall that has the attention of value investors and contrarians seeking a chance to buy high-quality banking franchises at fire-sale prices.
The Bullish Case: A Mental Exercise
We’ve been correctly positioned near our tactical portfolios’ equity minimums, yet we’re oddly compelled to use this month’s “Of Special Interest” section as a very public second-guessing of that move.
Knee Deep In An Earnings Recession
It’s a scary thought but what does 2015 have in common with the infamous years of 2001, 2008, and 2009? An earnings recession for the S&P 500 — and the 2015 vintage certainly has some unique traits.
Quantitative Factor Performance: What Is Working?
For the third consecutive year (thus far), quantitative factors worked best within the Materials sector. Energy also saw success as the decline in oil hurt the same stocks as in 2014. Factors were least effective in Health Care and Telecom.
Surveying The Commodity Carnage
The wreckage is beginning to look interesting and—with our cautious stance on the stock market—it would be fun to be bullish about something. Both our GS Scores and intuition suggest it’s still too early.
A Good Year To Play The Bounce?
Our research shows that the best years to “Play The Bounce” are generally ones in which the stock market is heading down into the fourth quarter. We won’t rule out an allocation to the Bounce strategy in the weeks ahead.
Oil Price “Crashes” In Historical Perspective
In view of the last year’s steep decline in oil prices, Energy has been a frequent headline topic.
Value, Momentum, And The Stock Market Cycle
Conventional measures of market action, like breadth and industry leadership, point to the formation of a bull market top. Divergences abound.